Tuesday, December 19, 2017

Yes, the contest has been closer than in 2012. Nevertheless, the BJP's win in Gujarat is remarkable. It comes after 22 years of BJP rule and it happened inspite of the BJP's willingness to steer clear of assured vote-catchers such as farm loan waiver and quotas for particular groups, both of which the Congress resorted to.

There were reasons for the electorate in Gujarat to be unhappy- farmers, MSMEs, youth and others are unhappy with economic conditions. Nevertheless, they did not think it necessary to disturb the status quo. Gujarat has seen economic progress and the absence of caste and communal strife for over 15 years now, and voters seem to have judged that it's not wise to disturb this state of affairs.

Wednesday, November 22, 2017

Most analysts think that Moody's upgrade is merited by the raft of reforms we have seen under the Modi government. I disagree. It's certainly true that the reforms have improved India's economic fundamentals. They have brightened the prospects of India growing at over 7.5%. But, I would argue that, even without the reforms, India's ability to service its debt has not been in doubt. In 2007- 17, which is a period consequent to the global crisis, we have seen a decline in India's debt to GDP ratio in the face of an adverse external environment. I would, therefore, argue, that this record merited an upgrade even without the reforms we have had recently.

If there is one economic measure which will make a difference to India's growth prospects in the near future, it is the massive bank recapitalisation package. Demonetisation will yield results but only over a long period. GST is hugely positive but only over the medium term. With bank recapitalisation, we can almost see an "announcement effect"- an impact almost immediately after announcement. One obvious impact is the rise in the prices of public sector bank shares. But also, as the package gets finalised, we can see a little more boldness in lending on their part.

The package is indeed massive and it required guts for the Modi government to announce something of this magnitude. My only regret is that it didn't happen much earlier.

Wednesday, September 20, 2017

Raghuram Rajan was in India recently and he hold forth on a wide range of subjects in numerous interviews. Many interviewers tried hard to to get him to say that his differences with the government on demonetisation caused his exit from RBI. Rajan didn't quite oblige.

He was also asked if he would have resigned if demonetisation had been pushed in his time as Governor. He said he could have answered the question only if he had been confronted with the proposition when he was Governor. All he could say now was that if a civil servant did not want to go along with any government measure, the only option was resignation.

I thought his views on the banking sector deserved more coverage than those on demonetisation- he didn't really have much to add to the latter.

My column on this subject in BS is reproduced below:

Rajan in the limelight againT T Ram Mohan
Former Reserve Bank of India (RBI) governor Raghuram Rajan came, he saw, he conquered the media. For a year following his exit as RBI governor, Dr Rajan
had chosen to maintain silence on the Indian economy. During his recent
visit to India, it was hard to open a newspaper or switch on a channel
without seeing an interview with him.

The interviews covered pretty much the same ground, with the focus always on demonetisation. Dr Rajan
said many things that would have gladdened the hearts of those critical
of the initiative. Yes, he had expressed his reservations when the
proposal was put to him. And, yes, he thought the short-term costs were
steep — he mentioned estimates in the range of 1-2 per cent of the gross domestic product (GDP). And, yes again, he wasn’t sure the long-term benefits justified the costs. It’s fair to say that Dr Rajan
hasn’t added anything to the debate on the subject. We do not have a
handle yet on either the costs or the benefits of demonetisation.

The focus on demonetisation was a bit unfortunate as it overshadowed some pretty strong remarks Dr Rajan made about the banking system. Dr Rajan
expressed reservations about mergers of public sector banks (PSBs). He
warned that it would be unwise to attempt mergers at a time when PSBs
were weak and wrestling with the problem of high levels of
non-performing assets. One hopes the finance ministry is listening.

Dr Rajan was equally forthright on the need to do what it takes to recapitalise PSBs. He went so far as to say that the government
should provide the necessary capital to PSBs even if it meant cutting
allocations on other heads. The government and the top brass at the RBI
have been telling us that some PSBs are so hopelessly deficient in
managerial capabilities that putting more capital into them is money
down the drain. Rajan clearly doesn’t think so.

We have thus far got banks to clean up their balance sheets
without providing them the necessary capital. By many estimates, PSBs
would require another ~1 lakh crore in order to meet the regulatory capital requirement. The Budget for this year has provided for just ~20,000 crore. Dr Rajan believes this is a sure recipe for holding up growth in credit and private investment.

Dr Rajan’s views on reform of governance at PSBs are
rather more debatable. He wants the Banks Board Bureau (BBB) to have
greater autonomy from the government. He would like the Department of
Financial Services (DFS), whose job is to monitor PSBs, to be closed
down. He wants PSBs to be monitored entirely by independent boards,
presumably appointed by a truly independent BBB.

These views have wide currency today. However, the notion that
PSBs should be freed from the supposed tyranny of the DFS is
conceptually flawed. It overlooks a crucial fact about the governance
model that obtains in India: Ownership of enterprises, whether in
the public sector or the private sector, is not widely dispersed, as it
is in the Anglo-Saxon model. We have instead a dominant owner in either
the government or in industrial houses.

Where there is a dominant owner, the role of the board is rather
more limited than in cases where ownership is widely dispersed. It is
natural for the dominant owner to call the shots. The government cannot
be expected to adopt a hands-off policy towards PSBs any more than Tata,
Birla or Ambani can in their enterprises.

Moreover, it is possible to overstate the effectiveness of
“independent” boards. Boards the world over are notoriously ineffective,
which is why corporate governance is still work in progress more than
two decades after the movement began. Those familiar with the working of
PSBs would know that it is the government director and the RBI director
who often make the most meaningful interventions.

Leaving matters at PSBs entirely to independent directors could,
therefore, create a dangerous governance vacuum. There remains a case
for the DFS to play a monitoring role. What is undesirable is that the
DFS should issue directives to the CEOs of PSBs. Instead, the DFS should
communicate its views through its nominee directors on boards, thereby
strengthening the effectiveness of boards.

What Dr Rajan did not say is also significant. Dr Rajan is no foe of the private sector. Yet he made no mention of privatising any of the PSBs. Dr Rajan’s
silence on privatisation at a time when “strategic sale” is the
buzzword should make the finance ministry sit up and take note.

Thursday, August 10, 2017

Newly appointed chief of Niti Aayog Rajiv Kumar's article about foreign-trained economists exiting their plum posts in the Indian government one by one has sparked a controversy. Kumar wrote:

A key transformation taking place on the policy front in the current central government led by Narendra Modi,
is that the colour of foreign influence, especially Anglo-American, on
the Indian policy making establishment that came in the last few
decades, is fading away. Raghuram Rajan has already left. Now, Arvind
Panagariya has also announced his resignation from his post ahead of his
term being completed. If Lutyen’s Delhi rumours are to be believed,
more such resignations can come. In their place, we may see experts
being posted who understand India’s ground realities in a much better
manner, and who can commit to stay and work till their term ends.

I guess the point is not just about whether those parachuted into top positions from abroad understand the Indian ground reality well enough. There's also the question of whether they can work with the bureaucracy and Indian businesses to produce acceptable solutions to problems. Another issue is whether they have the commitment to complete their tenure. Panagariya has quite after two years because he doesn't want to lose his tenure at Columbia. Did he not think of this when he accepted the assignment?

The problem is not confined to economists. Former IIM Bangalore director Sushil Vachani quit two years into his job when he found the ministry was not willing to relax the retirement age of 65 for him. Those hiring from abroad should make one thing clear to prospective hires: if you don't have it in you to complete your tenure, please do not accept the position.

The best part of the controversy is that it has spawned some excellent versification:

Bibek Debroy: “The foreign influence wanes, So read the
weather vanes. Filthy lucre of a foreign land/ Has sullied many
a hand/ And fogged the brains,”

Sadanand Dhume: “All this is very well/ But it’s hard
to sell/ Cambridge as a native school/ Oxford as a gurukul/ How some manage, pray
tell.”

Wednesday, July 05, 2017

BS carries a review today of my book, Towards a safer world of banking: bank regulation after the sub-prime crisis

Options on the future of bankingBook review of 'Towards a Safer World of Banking'Udit Misra July 04, 2017 Last Updated at 22:41 ISTTowards a Safer World of BankingBank Regulations after the Subprime CrisisT T Ram MohanBusiness Expert Press149 pages; Rs 2,396

Towards a Safer World of Banking by T T Ram Mohan, who is a professor of finance and economics at the Indian Institute of Management, Ahmedabad, is a nifty little book aimed at students of business management and bank executives. It makes sense to take a relook at the world of banking since it is almost a decade since some of the biggest banks in the financial world such as the Bank of America, the Royal Bank of Scotland, the Citigroup as well investments banks such as Bear Stearns and Lehman Brothers either failed or nearly did. Since then, governments and taxpayers have been bailing out the troubled banks in the hope that doing so would be, in the long run, cheaper than the cost of letting such entities sink. But this process has been arduous, with massive and unsavoury political and social repercussions. Not surprisingly, there is considerable interest in ensuring thatsuch a contagion does not recur. This book, then, is an appropriate read for anyone wanting to understand whether we have done enough to ensure that.

The book is divided into five chapters. In the first two, the author discusses the financial and banking crisis that started in 2007 and the causes for the subprime crisis. Now, there is no dearth of reasons advanced for the meltdown. In fact, depending on who you might have read and what you do for a living, you could choose from the long list of causes and not be entirely wrong. This is known as the “MurderontheOrientExpress” theory of the crisis. But therein lies a problem. Unless one can zero in on the exact problem you cannot even begin to provide a lasting policy solution. So the author helps the reader tussle with questions such as: Does an economic contraction cause a banking crisis or the other way round?

Similarly, the author analyses each of the 12 broad reasons given for the subprime crisis, such as the existence of a housing bubble in the US and elsewhere, loose monetary policies, greedy consumers, excessive financialisation or the global macroeconomic imbalances, to name a few. But many of these factors existed in the past and in other places without causing a global crisis. For instance, there have been periods of low and falling interest rates or instances of housing bubbles in several other countries. In the end, though, the author settles for “regulatory failure” as the principal culprit. According to him, there were “serious failures in relation to banks” such as lowering of loan writing standards, a focus on trading income by holding securitised assets and low amount of equity capital in relation to assets and so on. The author takes into account the analysis by Atif Mian and Amir Sufi in their book, A House of Debt, which gives primacy to the excessive buildup ofprivate debt. But Professor Mohan Ram argues that this, too, only shows that the ambit of regulation should have been much broader.

The third chapter focusses on regulatory reforms since the crisis. Much has been done, from increased capital requirements and far more stringent norms for liquidity to tighter norms for securitisation and macroprudential regulations. This has yielded results. As of 2015, in the US, for instance, the top five banks had a common equity Tier 1 ratio that was higher than that specified by Basel III and all but one bank surpassed higher requirements imposed by the US Federal Reserve. There have been similar improvements in the Europe as well. And yet, chapter four argues, not enough has been done to deal with the key problem that still exists: Banks being too big to fail. There is growing concentration in the banking sector, which, in turn, makes the whole sector more vulnerable.

Chapter five is about solutions. The author is among those who thinks that radical and outoftheboxideas are needed to disasterproof the banking system. Some of the ideas discussed include the “sharedresponsibility mortgages” proposed by Messrs Mian and Sufi. In such a mortgage, the lender offers downside protection to the borrower while the borrower agrees to give 5 per cent capital gain to the lender on the upside. Also discussed is the chairman of the Institute for New Economic Thinking Adair Turner’s even more radical suggestion to limit the amount of debt creation itself.

But perhaps the most unusual solution is the one proposed by the author: India’s experience with public sector banks (PSBs). These last 10 pages of the book are likely to elicit far more interest among the Indian readers who are at present witnessing an embarrassing bloodletting in India’s PSBs. The author argues that the Indian experience, where PSBs account for 70 per cent of the banking system, as well as the Chinese setup, where similar entities account for 90 per cent of the system, are responsible for these countries being the world’s fastest growing economies.

But it is all too clear that Indian PSBs are holding back growth instead of delivering it. The author offers a spirited defence for the PSB functioning — but stops at 2013-14. That is exactly the point at which the problems starting showing up. The author’s argument that PSBs’ troubles in the past two or three years are the result of structural failings of a developing country (such as the lack of a well developed bond market) is not entirely convincing. The truth is that the deep rot in Indian PSBs highlights the risks associated with government ownership of banks.

Wednesday, June 21, 2017

A certain complacency seems to have set into the banking sector following the reforms put in place after the financial crisis of 2007. Bank managers especially think that banks are safe now, thanks to the combination of higher capital requirements and living wills. Jamie Dimon, chairman of J P Morgan Chase, typies this point of view.

I am among those who would beg to defer. Banks may be better placed than before but banking systems remains fragile. Regulators need to raise the capital requirements even further. The minimum leverage ratio (the ratio of equity to assets) for banks is general is 3%; for systemically important banks, it's 5-6%. The US Congress has a proposal which would give banks a choice of going with Basel 3 and the Dodd-Frank provisions or having a leverage ratio of 10%. The latter is indeed the way to go.

Thursday, June 15, 2017

A joke deemed sexist has cost a board member of Uber his place on the board, FT reports. Board member David Bonderman, had to quit after he interrupted Ms Arian Huffington, fellow member on the board, with a remark that was considered inappropriate:

As Ms Huffington was telling staff that research showed boards with
one female director were more likely to appoint a second, Mr Bonderman
interjected: “Actually what it shows is that it’s much more likely to be
more talking.” Ms Huffington laughed awkwardly and said it would
be his turn to talk soon. After the meeting, Mr Bonderman emailed Uber
employees to apologise — and later announced he was resigning from the
board.

The problem, of course, is that the remark could not have been made at a worse time. The board of Uber is dealing with serious cultural issues, including issues of harassment, highlighted by a report commissioned by the board. The report has led to the exit of several senior executives and the founder and CEO, Travis Kalanick, has proceeded on indefinite leave, although it appears he will still be involved in strategic decisions and key leadership appointments.

The refreshing takeaway from the turmoil at Uber is that the world is no longer going to accept a firm just because it has a great valuation. Culture matters. Which means how you create value is also important. It's hard to beat a quote the FT carries on the subject:

“The spoiled brats of Silicon Valley don’t know the basics,” said Vivek
Wadhwa, a fellow at the Rock Center of Corporate Governance and author.
“It is a revelation for Silicon Valley: ‘duh, you have to have HR
people, you can’t sleep with each other . . . you have to be
respectful’.”

Sunday, June 11, 2017

Infosys, TCS, Cognizant and other Indian IT firms have had to take tough questions from investors on the cash pile they have been sitting on for years. This pile produces low returns from investment in bank deposits and the rest. Investors think if the firms have no investment avenues for the pile, they should return much of it to investors. At long last, the tech firms have said yes.

Huge cash piles are not limited to Indian tech firms.Schumpeter points out that the top five tech firms of the world- Apple, Alphabet, Microsoft, Amazon and Facebook- are sitting on a net cash (cash minus debt) pile of $330 bn, twice their gross cash flow. This is set to touch $ 680 bn by 2020, three times their cash flow.

One reason for the cash pile is that much of it is stashed away abroad and not brought back to the US in order to avoid tax. But the tax bill by itself does not justify the cash hoard. Another reason is having to making large investments in R&D. The five tech firms spent $100 bn on investment last year. For them not to grow their cash pile, Schumpeter estimates that investment would have to rise to $300 bn. That is a staggering figure by any reckoning:

That is over twice what the global venture-capital industry spends each
year. It is 51 times the annual cash burned up by Netflix, Uber and
Tesla, three firms famous for being cash hungry. And it is 37 times the
average annual amount of cash the five firms have in total spent on
acquisitions to gain new technologies and products, such as Facebook’s
$19bn purchase of WhatsApp, a messaging service in 2014, or Google’s
$3.1bn acquisition of DoubleClick, an advertising firm, in 2007.

What could be the reason then for the cash pile? Schumpeter reckons that uncertainty about future profit could be a factor. The tech firms probably reckon that the cash pile may not grow as much as projected now, given that various threats could emerge. But if they do manage to add on to their cash they may diversity in a big way into cars, media or hardware firms.

Friday, June 09, 2017

Schumpeter, writing in the Economist, gives an interesting breakdown of the sources of funds for HBS: tuition fee (17%), executive education (23%), publishing (29%) and endowments (31%). The IIMs and other business schools should compare their own funding pattern with that of HBS and see how they stack up. The crucial thing to note is that tuition accounts for only a sixth of revenues.

The break-up for IIMA in 2013-14 (the last year for which the annual report is available) is: tuition fee (43%), consulting (22%), interest income (21%) and others (14%). It should be clear that tuition bears a much bigger chunk of the burden of generating funds at IIMA than at HBS.

Tuesday, June 06, 2017

I argue in the Hindu today that the case for a rate cut is quite compelling. It's not just that CPI inflation is below the RBI target of 4%. The strengthening rupee and strong capital inflows address a concern RBI would have had even a few months ago: lowering the gap between Indian and dollar yields would cause an exodus of funds and destabilise the rupee. We don't have to worry that much about the Fed stance at the moment.

A rate cut will not just boost growth, it will help the bottom lines of banks and that of corporates- it would help address the "twin balance" sheet problem. The problem, as I see it, is that the RBI committed itself to a 4 per cent inflation target when the government gave it a flexible band of 4 plus or minus 2 per cent. Now, that's called being overzealous.

By the way, Surjit Bhalla flays the MPC today for getting its inflation forecasts hopelessly wrong:

At its first demonetisation meeting on December 7, the MPC concluded
that demonetisation was temporary and so, it should look through its
effects on dampening inflation and growth. It expected inflation and GDP
growth to hustle up in a “V-shaped” pattern. The reality — GDP growth
has been flat at 7 per cent, inflation has followed just the first half
of the V. The MPC’s post-demonetisation short-term three-month forward
forecast for March 2017 was 5 per cent with an upside bias. Actual March
2017 CPI inflation — a low 3.5 per cent! Actual April CPI inflation — 3
per cent. I have searched far and wide but not found any central bank,
or even an amateur economist, with such a large forecast error for a
three-month projection. These forecast errors are liable to get worse.

He also points out that the RBI has moved deftly from targeting headline inflation to what he calls a "false" measure of inflation:

First, the MPC broadly hinted that it was going against its own
mandate of targeting headline inflation and was now considering
targeting core inflation. But most brazenly, it chose to emphasise false
core inflation as its target, that is, core inflation including petrol.
No central bank in the world targets false core; it seems the RBI felt
it was appropriate to do so because oil prices were hovering round
$55/barrel and domestic petrol prices were inflating at 18 per cent per
annum. So false core was sticky at 5 per cent, as the MPC “rightly”
concluded. However, no sooner had the MPC penned this excuse that oil
prices (internationally and domestically) began to fall. And, along with
it, false core inflation. The April CPI data, released just days after
the MPC excuses on April 7, now showed even false core hovering around
4.4 per cent, having declined from 5 per cent a month earlier.True core inflation — CPI minus food minus energy minus petrol —
meanwhile continued its downward trend, 5.3 per cent in April 2016;
April 2017, it registered 4.2 per cent.

That's a pretty strong indictment. It's necessary to require the MPC to publish its forecasting record- forecast inflation versus actual - every time it meets. There is a fundamental problem with the MPC mandate: the MPC has to explain if inflation exceeds six per cent but not if inflation falls below 4 per cent (unless it dips below 2 per cent which is a remote possibility). Put differently, the MPC is accountable for inflation but not for growth. There has to be a way to address this issue. A good starting point is to publish the MPC's forecasting record.

Monday, June 05, 2017

Happy to share with you that my latest book is out. It's titled Towards a Safer World of Banking: Bank Regulation after the sub-prime crisis and is published by Business Expert Press in New York.

The book reviews the record of
financial crises in the past and the changes to bank regulation
since the sub-prime crisis. It argues that these changes are
inadequate. It contends that we need to think of some of the
out-of-the-box solutions proposed and it also suggests that
regulators elsewhere may have something to learn from the
experience of the Indian banking sector.

Tuesday, May 16, 2017

The government's Ordinance empowering the RBI to take steps to resolve the bad loan problem, it is hoped, will make a difference. It can- provided the government is willing to back it with the necessary capital. Indeed, by not infusing capital into public sector banks for so long the government has caused the bad loan problem to worsen. This is because banks have not been able to write off bad loans and because they haven't been able to expand credit, which, in turn, results in the bad loan to advances ratio looking bad.

Over a two year period, I expect the government will need to put in around Rs 100,000 crore. Mention something like this and you will see another round of public sector bashing. There will be calls to privatise PSBs because putting capital into them is "money down the drain".

Rubbish. You only have to look at the capital that governments in US and Europe have poured into private banks in order to see that this contention doesn't hold water. And here's an astonishing fact: the recapitalisation cost of India's PSBs, even if the government puts in Rs 100,000 crore on top of the Rs 70,000 crore it has committed under Indradhanush would be among the lowest in the world!

Don’t dither on bank recapitalisation Following the financial
crisis of 2007, America’s banks have bounced back faster than those in
Europe. There’s little dispute as to how this happened. The authorities
in the US moved faster to recapitalise banks than their counterparts in
Europe. In the US, the government pumped $245 billion into banks. The
banks eventually repaid $275 billion, including interest and dividend. There had been colossal
failures in both management and governance at American banks. Yet,
nobody argued that recapitalisation should be held back until these were
overhauled. The rule in a financial crisis is simple enough: Recapitalise
as quickly as you can. At many banks in the US, CEOs were replaced.
There were some changes in the composition of bank boards. But the
infusion of capital did not await a sea change in management or
governance. If governments in US and
Europe had withheld capital from banks until they had made sure that it
would be used wisely, they might have waited for ever. Recovery in those
economies would not have happened. The contrast in the
approach pursued in India could not be starker. In 2015 , the
requirement of equity capital at public sector banks (PSBs) was
estimated at around ~2,50,000 crore out of which at least ~1,25,000
crore was to have come from the government. Under Indradhanush, the government committed a much smaller amount — ~70,000 crore ($11 billion) — over a four year period, 2016-19.In 2016, following the Asset Quality Review, bad loans, and hence the requirement of capital, soared. The government has, however, stuck to the sum committed under Indradhanush.
It also took the position that capital would be given strictly on the
basis of performance — weaker banks would have to fend themselves. It
was a case of too little, too late. We should not be surprised that
banks have sunk deeper into the mire and economic recovery has been
tepid. Those opposed to giving
capital to PSBs contend that mismanagement and poor governance are
mainly responsible for the bad loan problems at PSBs. Infusing more
capital into them would be only “money down the drain”.They should have
said this to governments in the US and Europe who poured capital into privately owned banks during the financial crisis. The crisis of 2007 was only
the latest in nearly 150 episodes of banking crises in 115 economies in
the past four decades. Private banking systems plunge into crisis time
and again. Each crisis makes enormous demands on tax payer money. That
does not seem to be “money down the drain”. It is not true that the bad
loan problem in India is mainly on account of mismanagement. The
Economic Survey (2016-17) says emphatically, “Without doubt, there are
cases where debt repayment problems have been caused by diversion of
funds. But the vast bulk of the problem has been caused by unexpected
changes in the economic environment: Timetables, exchange rates, and growth rate assumptions going wrong.” Translation: The bad loan problem is the result mostly of factors beyond the control of bank management.If the finance ministry
takes its own Chief Economic Advisor seriously, the course for
the government should have been clear enough long back: Provide
enough capital to PSBs, ensure the right people are appointed as CEOs
and strengthen the boards. None of this happened. The bad loan problem
has remained unresolved. Together, these have led to a worsening of the
financials of PSBs.

The government seems to have
finally come out of its stupor. An Ordinance that empowers the RBI to
address the bad loan problem has been issued. CEOs have been appointed
at 10 PSBs.
But these moves will not suffice unless they are backed with adequate
capital. This year’s provision of ~10,000 crore means nothing. If bad
loan resolution happens, the amount required this year alone could be up
to ~50,000 crore.

Most people will recoil in horror
at the sums involved. They will wail that PSBs make unacceptable demands
on the exchequer because of inefficiencies inherent in public ownership
of banks. This is an absolute myth.

The way banking systems are
designed today, they are prone to failure — and these are overwhelmingly
private banking systems. Governments everywhere incur recapitalisation
costs from time to time. The best we can hope for is that the costs stay
below an acceptable threshold. The Vickers Commission in the UK defined
the threshold as an annual cost
of 3 per cent of GDP. If this seems excessive, a cost of 5 per cent of
GDP over, say, two decades would be the absolute minimum.

The cost of recapitalising PSBs
over the entire period 1994-2016 amounts to less than 0.5 per cent of
India’s average GDP in the period. This is about the lowest
recapitalisation cost that any banking system in the world has inflicted
on the economy. Enough of dithering. The government should put in
whatever it takes to recapitalise PSBs.

Thursday, April 27, 2017

The IMF sees the world economy emerging from its prolonged post-crisis slump in 2017 and 2018. It appears that expansionary monetary policy and fiscal policy (until it was reversed a couple of years ago) have borne fruit. Or it could just be that the world has been through the eight years or so takes to emerge from a serious financial crisis (Rogoff and Reinhart).

There are, however, too many imponderables in the picture- doubts about the fiscal expansion promised by Trump (given the difficulties he's had in dealing with Congress), Brexit and its likely fallout, China's debt overhang, rising protectionism and anti-globalisation sentiment and major geo-political risks, including all-out war in the Korean peninsula. So I wouldn't want to celebrate right away.

Monday, April 24, 2017

The Trump administration has ratcheted up tensions with North Korea to a new high. An American armada has been sent to the Korean seas. The US has put in place a sophisticated missile defence system in South Korea. And Trump has issued several warnings to North Korea. The provocation is said to be North Korea's attempt at testing a missile that could hit California.

But there is a history to North Korea's nuclear missile programme that finds little mention in the western media. The western media paints North Korea's ruler Kim Jong Un as a madman bent on self-destruction and his country as a poor, backward nation that could collapse any time.

As Bruce Cumings, the leading Western academic expert on the DPRK, puts it:"North
Korea is the only country in the world to have been systematically
blackmailed by US nuclear weapons going back to the 1950s, when hundreds
of nukes were installed in South Korea… Why on earth would Pyongyang
not seek a nuclear deterrent? But this crucial background doesn’t enter
mainstream American discourse.

....An internal CIA study almost grudgingly acknowledged various
achievements of this regime: compassionate care for children in general
and war orphans in particular; “radical change” in the position
of women; genuinely free housing, free health care, and preventive
medicine; and infant mortality and life expectancy rates comparable to
the most advanced countries.Life expectancy at birth is 70.4
years. Hospital bed density (number of hospital beds per 1,000 of the
population) is 13.2 – quadruple that of the United Kingdom. The entire
population has access to improved drinking water. The literacy rate is
100 percent. Think these statistics come from the DPRK’s ministry of
propaganda? They’re from the CIA World Factbook. Most developing countries would be very happy to achieve such figures.

North Korea has a no first use policy on nuclear weapons. The US will not reciprocate. The US will not offer a non-aggression pact either. It won't withdraw its troops from South Korea in exchange for a nuclear deal with North Korea. What the US will do is intimidate and bully. North Korea refuses to be bullied.

Let me add what Paul Craig Roberts, a respected journalist and former policy maker has to say on the subject:

The Chinese government has said that the moronic Americans could
attack North Korea at any moment. A large US fleet is heading to North
Korea. North Korea apparently now has nuclear weapons. One North
Korean nuclear weapon can wipe out the entirety of the US fleet. Why is
Washington inviting this outcome? The only possible answer is moronic
stupidity.North Korea is not bothering anyone. Why is Washington picking on
North Korea? Does Washington want war with China? In which case, is
Washinton kissing off the West Coast of the US? Why does the West Coast
support policies that imply the demise of the West Coast of the US? Do
the morons on the West Coast think that the US can initiate war with
China, or North Korea, without any consequesnces to the West Coast? Are
even Americans this utterly stupid?

It has become embarrassing to be an American. Our country has had four
war criminal presidents in succession. Clinton twice launched
military attacks on Serbia, ordering NATO to bomb the former Yugoslavia
twice, both in 1995 and in 1999, so that gives Bill two war crimes.
George W. Bush invaded Afghanistan and Iraq and attacked provinces of
Pakistan and Yemen from the air. That comes to four war crimes for Bush.
Obama used NATO to destroy Libya and sent mercenaries to destroy
Syria, thereby commiting two war crimes. Trump attacked Syria with US
forces, thereby becoming a war criminal early in his regime.

I lost my father, T T Vijayaraghavan, a veteran journalist, last December. It's turned out to be more shattering than I could have ever imagined.

I grew up with the smell of newspapers and books around me and the goings-on in the world of journalism were the staple of conversations at home. I have spent time in the corporate world and in academics but have never quite managed to get the journalism bug out of my system. I remain at heart a journalist, thanks largely to father's influence.

Here's a little tribute I penned in EPW. A former colleague of father's has responded with a very touching letter to the editor.

PS: As the tribute is behind a pay wall, I reproduce it below:

Other Days, Other Times Remembering T T Vijayaraghavan

T T Vijayaraghavan (TTV), who passed away recently, was a member of the core group of journalists that launched the Economic Times (ET)
in 1961. TTV joined the paper as assistant editor and served it with
distinction for two decades. The other key members at the inception of
the paper were: P S Hariharan (editor), T K Seshadri (news editor),
Hannan Ezekiel and A R Rao (both assistant editors).

The idea of producing a financial daily in India was altogether novel
at the time. There were serious doubts as to whether there was a large
enough market for such a paper. It is to the credit of Shanti Prasad
Jain, the then proprietor of Bennett Coleman and Company, that he gave
the idea his fullest backing, and supported its losses for several
years. Jain was keen that the fledgling daily attract the best talent,
so he encouraged the management to offer its recruits terms that were
superior to those of the Times of India (ToI), something that caused heartburn at the group’s flagship.
TheETstaff were lodged in the third floor of the Times of India
building in Mumbai, along with those of ToI. A striking feature was the
long corridor with a line of cabins with Belgian glass to the left (on
the opposite side was the ToI newsroom and further down theETnewsroom). These cabins, which had a certain aura about them, housed the editors of ToI andETand the assistant editors.
TTV’s background had prepared him well for the assignment. He had
obtained his Master of Arts in economics from the prestigious Presidency
College in the then state of Madras. B D Goenka, son of Indian Express founder Ramnath Goenka, was a classmate at the intermediary level and G Kasturi, later to become a legendary editor at the Hindu, at the masters. TTV developed a friendship with Kasturi that lasted a lifetime.
After a brief stint in government, in Shimla, TTV plunged into journalism, joining the Hindu as
a reporter before being transferred to the editorial desk. He spent 10
years with the paper, imbibing the basics of news gathering, layout, and
analysis from personalities such as Kasturi Srinivasan (its then
editor), the formidable editorial writer N Raghunathan and K Balaraman,
later to become the paper’s celebrated Washington correspondent. TTV
remained unshaken in his conviction that no Indian paper could match the
Hindu in thoroughness and credibility.
From the Hindu, TTV moved to the Eastern Economist, a financial weekly published from Delhi and edited by E P W Da Costa (no connection with this journal!). Long before the Economic & Political Weekly made its mark, the Eastern Economist had established itself as a quality publication.
TTV’s five-year stint at the Eastern Economist proved useful
to the launch of ET. He was well-tuned to a range of economic events
that would require coverage and comment. The core group spent several
months in coming out with dummy runs before the paper was formally
launched.
One of TTV’s early contributions was to start a page for book
reviews. He remained in charge of the page throughout his association
with ET. He wrote a column, “Men and Ideas” in which he profiled
important personalities in the news. The response he got was
heart-warming: a profile of Homi Bhabha fetched a dinner invitation and a
folio of Bhabha’s paintings.
Some five years after the paper was set up, Hariharan left and D K
Rangnekar took over as editor. Rangnekar, who had a doctorate from the
London School of Economics, was that exceptional journalist who combined
academic depth with the racy writing that is the hallmark of
journalism. The paper gained in stature in his time. ET’s editorials
came to be closely followed by the powers-that-be in New Delhi.
One incident that comes to mind is when the Shiv Sena went on a
rampage against people from the South, beating up Malayali hawkers in
the Flora Fountain area.ETcarried an editorial, “Glaring
at Noon,” borrowing the title from Arthur Koestler’s famous novel about
the Stalinist era. The edit hinted at collusion between the state
government and the Shiv Sena. A day or two later, Rangnekar got a call
from the chief minister (S B Chavan, as I recall). The chief minister
fumed about the editorial; P N Haksar had called and conveyed the Prime
Minister’s displeasure. How couldEThave painted such a dark picture of the city? Rangnekar told him quietly—so he confided in TTV—“I saw it with my own eyes.”
TheETof that era was a very different paper from what
it is today. News was mostly macroeconomic, business or corporate news
was secondary. The editorial policy hewed closely to the Nehruvian line.
Socialism (and a prominent role for the public sector), secularism and
non-alignment were taken as verities.
Mornings at home began with a dissection ofETand
other papers. Why had ToI chosen to spread the main story over four
columns? Two columns would have been more appropriate; the Indian Express
had got it right. Why had another story got buried in page five in the
ToI? ET’s choice of page one was correct. The box item in a paper was
plain sensationalism. And so on. It was an era in which sobriety,
accuracy and a commitment to the public good were the touchstones for
news coverage and commentary.
TTV also made his contribution to financial journalism in Tamil. For
several years, he wrote a monthly column for the Tamil magazine Deepam
founded by the well-known Tamil litterateur, Naa Parthasarathy. A
connoisseur of Carnatic music, he wrote reviews of concerts for the Evening News, the afternoon paper run by the Times group and also on the cultural scene for the ToI.
TTV leftETin 1981, just a couple of years before he
was due to retire. He briefly edited the management journal of the
Bombay Management Association. He revived his association with Eastern Economist,
then edited by Swaminathan Aiyar, producing a weekly newsletter that
focused on developments in various sectors of the economy. He also wrote
for the Indian Post and Business Standard.
I may be permitted to end on a more personal note. I started contributing toETin
1987 while a student in New York. I was appointed stringer in New York
for the paper in 1988. On my return to India, I continued to write for
the paper. I began a fortnightly column forETin 1997 which continued until 2013. It is fair to say that the family association withETspans most of its history. It is a gratifying thought.
- See more at: http://www.epw.in/journal/2017/12/commentary/other-days-other-times.html#sthash.0HoyPyja.dpuf

The idea of producing a financial
daily in India was altogether novel at the time. There were serious doubts as
to whether there was a large enough market for such a paper. It is to the
credit of Shanti Prasad Jain, the then proprietor of Bennett Coleman and
Company, that he gave the idea his fullest backing, and supported its losses
for several years. Jain was keen that the fledgling daily attract the best
talent, so he encouraged the management to offer its recruits terms that were
superior to those of the Times of India (ToI), something that caused
heartburn at the group’s flagship.

TheETstaff were
lodged in the third floor of the Times of India building in Mumbai,
along with those of ToI. A striking feature was the long corridor with a line
of cabins with Belgian glass to the left (on the opposite side was the ToI
newsroom and further down theETnewsroom). These cabins, which
had a certain aura about them, housed the editors of ToI andETand
the assistant editors.

TTV’s background had prepared him
well for the assignment. He had obtained his Master of Arts in economics from
the prestigious Presidency College in the then state of Madras. B D Goenka, son
of Indian Express founder Ramnath Goenka, was a classmate at the
intermediary level and G Kasturi, later to become a legendary editor at the Hindu,
at the masters. TTV developed a friendship with Kasturi that lasted a lifetime.

After a brief stint in government,
in Shimla, TTV plunged into journalism, joining the Hindu as a reporter
before being transferred to the editorial desk. He spent 10 years with the
paper, imbibing the basics of news gathering, layout, and analysis from
personalities such as Kasturi Srinivasan (its then editor), the formidable
editorial writer N Raghunathan and K Balaraman, later to become the paper’s
celebrated Washington correspondent. TTV remained unshaken in his conviction
that no Indian paper could match the Hindu in thoroughness and
credibility.

From the Hindu, TTV moved to
the Eastern Economist, a financial weekly published from Delhi and
edited by E P W Da Costa (no connection with this journal!). Long before the Economic
& Political Weekly made its mark, the Eastern Economist had
established itself as a quality publication.

TTV’s five-year stint at the Eastern
Economist proved useful to the launch of ET. He was well-tuned to a range
of economic events that would require coverage and comment. The core group
spent several months in coming out with dummy runs before the paper was
formally launched.

One of TTV’s early contributions was
to start a page for book reviews. He remained in charge of the page throughout
his association with ET. He wrote a column, “Men and Ideas” in which he
profiled important personalities in the news. The response he got was
heart-warming: a profile of Homi Bhabha fetched a dinner invitation and a folio
of Bhabha’s paintings.

Some five years after the paper was
set up, Hariharan left and D K Rangnekar took over as editor. Rangnekar, who
had a doctorate from the London School of Economics, was that exceptional
journalist who combined academic depth with the racy writing that is the
hallmark of journalism. The paper gained in stature in his time. ET’s
editorials came to be closely followed by the powers-that-be in New Delhi.

One incident that comes to mind is
when the Shiv Sena went on a rampage against people from the South, beating up
Malayali hawkers in the Flora Fountain area.ETcarried an
editorial, “Glaring at Noon,” borrowing the title from Arthur Koestler’s famous
novel about the Stalinist era. The edit hinted at collusion between the state
government and the Shiv Sena. A day or two later, Rangnekar got a call from the
chief minister (S B Chavan, as I recall). The chief minister fumed about the
editorial; P N Haksar had called and conveyed the Prime Minister’s
displeasure. How couldEThave painted such a dark picture of the
city? Rangnekar told him quietly—so he confided in TTV—“I saw it with my own
eyes.”

TheETof that era was
a very different paper from what it is today. News was mostly macroeconomic,
business or corporate news was secondary. The editorial policy hewed closely to
the Nehruvian line. Socialism (and a prominent role for the public sector),
secularism and non-alignment were taken as verities.

Mornings at home began with a
dissection ofETand other papers. Why had ToI chosen to spread
the main story over four columns? Two columns would have been more appropriate;
the Indian Express had got it right. Why had another story got buried in
page five in the ToI? ET’s choice of page one was correct. The box item in a
paper was plain sensationalism. And so on. It was an era in which sobriety,
accuracy and a commitment to the public good were the touchstones for news
coverage and commentary.

TTV also made his contribution to
financial journalism in Tamil. For several years, he wrote a monthly column for
the Tamil magazine Deepam founded by the well-known Tamil litterateur,
Naa Parthasarathy. A connoisseur of Carnatic music, he wrote reviews of
concerts for the Evening News, the afternoon paper run by the Times
group and also on the cultural scene for the ToI.

TTV leftETin 1981,
just a couple of years before he was due to retire. He briefly edited the
management journal of the Bombay Management Association. He revived his
association with Eastern Economist, then edited by Swaminathan Aiyar,
producing a weekly newsletter that focused on developments in various sectors
of the economy. He also wrote for the Indian Post and Business
Standard.

I may be permitted to end on a more
personal note. I started contributing toETin 1987 while a
student in New York. I was appointed stringer in New York for the paper in
1988. On my return to India, I continued to write for the paper. I began a
fortnightly column forETin 1997 which continued until 2013. It
is fair to say that the family association withETspans most of
its history. It is a gratifying thought.

T T Vijayaraghavan (TTV), who passed away recently, was a member of the core group of journalists that launched the Economic Times (ET)
in 1961. TTV joined the paper as assistant editor and served it with
distinction for two decades. The other key members at the inception of
the paper were: P S Hariharan (editor), T K Seshadri (news editor),
Hannan Ezekiel and A R Rao (both assistant editors).
The idea of producing a financial daily in India was altogether novel
at the time. There were serious doubts as to whether there was a large
enough market for such a paper. It is to the credit of Shanti Prasad
Jain, the then proprietor of Bennett Coleman and Company, that he gave
the idea his fullest backing, and supported its losses for several
years. Jain was keen that the fledgling daily attract the best talent,
so he encouraged the management to offer its recruits terms that were
superior to those of the Times of India (ToI), something that caused heartburn at the group’s flagship.
TheETstaff were lodged in the third floor of the Times of India
building in Mumbai, along with those of ToI. A striking feature was the
long corridor with a line of cabins with Belgian glass to the left (on
the opposite side was the ToI newsroom and further down theETnewsroom). These cabins, which had a certain aura about them, housed the editors of ToI andETand the assistant editors.
TTV’s background had prepared him well for the assignment. He had
obtained his Master of Arts in economics from the prestigious Presidency
College in the then state of Madras. B D Goenka, son of Indian Express founder Ramnath Goenka, was a classmate at the intermediary level and G Kasturi, later to become a legendary editor at the Hindu, at the masters. TTV developed a friendship with Kasturi that lasted a lifetime.
After a brief stint in government, in Shimla, TTV plunged into journalism, joining the Hindu as
a reporter before being transferred to the editorial desk. He spent 10
years with the paper, imbibing the basics of news gathering, layout, and
analysis from personalities such as Kasturi Srinivasan (its then
editor), the formidable editorial writer N Raghunathan and K Balaraman,
later to become the paper’s celebrated Washington correspondent. TTV
remained unshaken in his conviction that no Indian paper could match the
Hindu in thoroughness and credibility.
From the Hindu, TTV moved to the Eastern Economist, a financial weekly published from Delhi and edited by E P W Da Costa (no connection with this journal!). Long before the Economic & Political Weekly made its mark, the Eastern Economist had established itself as a quality publication.
TTV’s five-year stint at the Eastern Economist proved useful
to the launch of ET. He was well-tuned to a range of economic events
that would require coverage and comment. The core group spent several
months in coming out with dummy runs before the paper was formally
launched.
One of TTV’s early contributions was to start a page for book
reviews. He remained in charge of the page throughout his association
with ET. He wrote a column, “Men and Ideas” in which he profiled
important personalities in the news. The response he got was
heart-warming: a profile of Homi Bhabha fetched a dinner invitation and a
folio of Bhabha’s paintings.
Some five years after the paper was set up, Hariharan left and D K
Rangnekar took over as editor. Rangnekar, who had a doctorate from the
London School of Economics, was that exceptional journalist who combined
academic depth with the racy writing that is the hallmark of
journalism. The paper gained in stature in his time. ET’s editorials
came to be closely followed by the powers-that-be in New Delhi.
One incident that comes to mind is when the Shiv Sena went on a
rampage against people from the South, beating up Malayali hawkers in
the Flora Fountain area.ETcarried an editorial, “Glaring
at Noon,” borrowing the title from Arthur Koestler’s famous novel about
the Stalinist era. The edit hinted at collusion between the state
government and the Shiv Sena. A day or two later, Rangnekar got a call
from the chief minister (S B Chavan, as I recall). The chief minister
fumed about the editorial; P N Haksar had called and conveyed the Prime
Minister’s displeasure. How couldEThave painted such a dark picture of the city? Rangnekar told him quietly—so he confided in TTV—“I saw it with my own eyes.”
TheETof that era was a very different paper from what
it is today. News was mostly macroeconomic, business or corporate news
was secondary. The editorial policy hewed closely to the Nehruvian line.
Socialism (and a prominent role for the public sector), secularism and
non-alignment were taken as verities.
Mornings at home began with a dissection ofETand
other papers. Why had ToI chosen to spread the main story over four
columns? Two columns would have been more appropriate; the Indian Express
had got it right. Why had another story got buried in page five in the
ToI? ET’s choice of page one was correct. The box item in a paper was
plain sensationalism. And so on. It was an era in which sobriety,
accuracy and a commitment to the public good were the touchstones for
news coverage and commentary.
TTV also made his contribution to financial journalism in Tamil. For
several years, he wrote a monthly column for the Tamil magazine Deepam
founded by the well-known Tamil litterateur, Naa Parthasarathy. A
connoisseur of Carnatic music, he wrote reviews of concerts for the Evening News, the afternoon paper run by the Times group and also on the cultural scene for the ToI.
TTV leftETin 1981, just a couple of years before he
was due to retire. He briefly edited the management journal of the
Bombay Management Association. He revived his association with Eastern Economist,
then edited by Swaminathan Aiyar, producing a weekly newsletter that
focused on developments in various sectors of the economy. He also wrote
for the Indian Post and Business Standard.
I may be permitted to end on a more personal note. I started contributing toETin
1987 while a student in New York. I was appointed stringer in New York
for the paper in 1988. On my return to India, I continued to write for
the paper. I began a fortnightly column forETin 1997 which continued until 2013. It is fair to say that the family association withETspans most of its history. It is a gratifying thought.
- See more at: http://www.epw.in/journal/2017/12/commentary/other-days-other-times.html#sthash.0HoyPyja.dpuf

Tuesday, April 18, 2017

We shut down two of three term finance institutions we had in the early 2000s, ICICI and IDBI, getting both converted into banks. IFCI changed into an NBFC later. Now, in a discussion paper, the RBI moots the idea of creating term finance institutions. Many, including former RBI Governor C Rangarajan, have long argued that closing down term finance institutions was a mistake and that we need to revive these in order to facilitate long term financing (given that bond markets have not taken off).

I think there is case for doing so. But, in today's conditions, only a government-owned institution with access to concessional finance will be viable. More in my BS piece, Back to term finance institutions?

As the BS article is behind a pay wall, I reproduce the article below:

The Reserve Bank of India (RBI) has
issued a discussion paper that moots the idea of long-term finance
banks. This would amount to seriously turning the clock back to the
early 2000s. We then had three development
financial institutions (DFIs) that focused on term finance, namely,
IFCI, ICICI and IDBI. Commercial banks confined themselves mainly to
providing working capital. There were reasons for
separating the two roles. Banks’ funds are mostly short-term in nature.
So their getting into term finance results in long-term assets being
financed by short-term funds. This exposes banks to interest rate and
liquidity risks.Secondly, providing project
finance requires appraisal skills of a different sort from those
required for providing working capital. Working capital is backed by
assets that are easily liquidated. Not so project finance. You have to
depend on cash flows to service the debt. This makes the evaluation of
risk far more challenging. Term-finance institutions
have to rely on long-term funds. This means more expensive funding and
hence costlier loans. The DFIs could get around this problem because
they were given access to low-cost funds — from the RBI and through bonds guaranteed by the government and that qualified as statutory liquidity ratio (SLR) securities. At their peak in the late 1990s,
the three DFIs accounted for nearly a third of gross fixed capital
formation in manufacturing. Most of the loans were made to
manufacturing. Lending to infrastructure accounted for just 15 per cent
of the total. (Deepak Nayyar, <i>Economic and Political Weekly<p>, August 15, 2015).Financial sector reforms in the
mid-1990s meant that concessional funding was out. Banks were allowed to
venture into long-term funding. DFIs were then reeling under the impact
of bad loans of the past. These together undermined the DFI model. The idea that working capital and long-term finance should happen under one roof took hold. The second Narasimham committee on
financial sector reforms (April 1998) and the S H Khan Working Group
(May 1998) both recommended that the roles of DFIs and banks be
harmonised.The RBI was not entirely
convinced. In a discussion paper published in January 1999, the RBI
warned, “Drastic changes in their (DFIs’) respective roles at this stage
may have serious implications for financing requirements of funds of
crucial sectors of the economy.”Nevertheless, the RBI chose to
fall in line with the Narasimham committee recommendations — it is often
said, under pressure from the international agencies that had provided
structural adjustment loans. The RBI advised the three DFIs to convert
themselves into banks or non-banking financial companies (NBFCs). ICICI and IDBI opted to merge with their banking subsidiaries. IFCI muddled along and eventually became an NBFC.In Japan and many East Asian
economies too, the role of DFIs was curtailed over time. But this
happened only after certain conditions had been met: A high savings rate, large foreign direct investment (FDI)
flows and considerable growth in domestic capital markets. The Indian
economy had not met these conditions in the early 2000s. Doing away with
DFIs at that point was thus rather premature.The RBI discussion paper seems
to acknowledge as much. It argues that, in recent years, bank lending to
the services sector, industry and small and medium-sided enterprises (SMEs)
has suffered thanks to the bad loans on their books. It says that banks
lack the expertise necessary for term finance. There is a need for term-finance institutions to fill these gaps. The proposed term-finance institutions
would have a minimum capital requirement of ~1,000 crore, higher than
the ~500 crore stipulated for commercial banks. They cannot have savings
accounts but they can have current accounts and term deposits with a
minimum of, say, ~10 crore. They would be exempt from cash reserve ratio (CRR)
requirement for funds raised through infrastructure bonds. These funds
would also need to be exempted from SLR requirements in line the
relaxation given to commercial banks. The key question, which the paper sidesteps, is: How do we ensure viability? If the proposed term-finance institutions
are to raise finance entirely from the markets, it will make their
loans far too expensive. Banks may be leery today of financing projects
at the outset. However, once a project is close to completion, they are
happy to refinance loans at lower rates. This is happening with power
projects, for instance. Term-finance institutions may not be viable as long as they face higher borrowing costs than banks. To be viable, they will need to
access concessional funding through government-guaranteed bonds and
low-cost funds from the international agencies. So, yes, there is room
for a term finance institution but only one that is promoted by the
government and gets subsidised funding — in effect, a new avatar of
IDBI. Will the government have the
stomach for an initiative that looks distinctly anti-reformist? Would it
want to promote a new financial institution at a time when it wants to
shrink the numbers of those that obtain today?

Saturday, April 15, 2017

Companies worldwide face scandals. (In India, we call them scams. I guess the difference between a a scandal abroad and a scam here is that there is retribution in the former and none in the latter).

It's no use exhorting managers to behave better. We must accept that those at the top will have the opportunity to misbehave- and many will use that opportunity.

The answer is for boards to get their acts together. Cliched as it may sound, we go back to corporate governance. I have been arguing for long that the answer lies in board room diversity. This is more than gender diversity (although that is certainly an important part of the answer). It means getting different views and perspectives into the board room. This cannot happen as long as board members are chosen from the same narrow club of retired and serving corporate executives and retired bureaucrats, the people who get to playing cards and billiards in the same elite clubs - when they are not playing games in the board room itself.

British Prime Minister Theresa May seemed to be on to something when she argued for a place for consumers and workers on boards soon after she took over. But British industry has stoutly resisted and we haven't seen much of these proposals. An article in FT writes of how deep the aversion to change runs in the UK:

A ......British government report expressed concerns that worker directors would lead to greater conflict in board discussion, slower decisions and “the risk of decision-making shifting away from the boardroom and into less formal channels”. It was an insight into the kind of boardroom thinking that seeks any excuse to avoid challenge from those with a different perspective. The message was that “we want to continue with things our way and if you make us have these people on our boards, we will simply have the real discussion behind their backs”.

.....The corporate elite was far too quick to shout down the idea of worker directors, just as it has been too slow to welcome women and minority groups. In the UK, employees are accepted on to pension trustee boards, where they are often highly commended for their ability to ask the right question and to identify the very heart of a matter. Boards can learn from that and from the limited experience of adding female directors, who have brought a different point of view into the boardroom.

And what if boards fail to act? Well, governments everywhere have to use the big stick. In India, the government should moot the idea of having SC/ST quotas on boards- in a way, this would amount to worker representation as well. It would a big blow for governance and a blow for affirmative action as well.

Tuesday, April 04, 2017

The Americans bombed the hell out of Iraq and helped Nato bomb the hell out of Libya. Earlier, they showed their firepower in Serbia. Now, we are getting a taste of American intervention in Mosul in Iraq and in the Raqqa province of Syria.

The Americans seem to have learnt one big lesson from Vietnam: by all means get involved in savage wars elsewhere but make sure there are not too many of your own body bags. You do this by using mainly air power and forging alliances with locals who will do the dirty work on the ground.

The Economist has an interesting review of a book the war in Laos which shows that this is an approach the Americans used way back in the 1960s, although it was not particularly effective there. The bombing was savage alright:

Hitting the Pathet Lao in the north and on the Ho Chi Minh trail in the
south, the American air force unleashed an average of one attack every
eight minutes for nearly ten years. By 1970 tens of thousands of
American-backed fighters were involved, at an annual cost of $3.1bn in
today’s dollars. By the time the campaign ended in 1973, a tenth of
Laos’s population had been killed. Thousands more accidental deaths
would follow from unexploded bombs left in the soil.

This was labelled a 'secret war' not because it was a secret but because US officials had perfected the art of denial. One innovation was the use, not of the US army, but that of the CIA as a paramilitary force. When you use the army, it's hard to keep things wrap; it's much easier to do so with the CIA. That way you can also ensure less media coverage.This, the Economist notes, is continuing today in Somalia, Yemen and elsewhere.

You have to grant it to the Russians: when they stepped into Syria in 2016, it was official and legal.

It appears that the government will rely on the RBI to resolve the long-festering NPA issue. ET reports that the government may issue an ordinance to empower the RBI suitably. It appears that there is a ray of hope on the NPA problem.

It's not clear, though, how exactly the RBI will be empowered. It cannot be that the RBI proposes loan resolution because that would bring into conflict with its duties as a regulator, in which capacity it will have to examine whether loan settlement has been proper enough.

The ET report suggests that the RBI may operate through Oversight Committees. Presumably these will have professionals from outside the RBI and will act at an arm's length. My own preference would be for a Loan Resolution Authority- comprising former bankers, academics, chartered accountants, lawyers and other professionals of repute- created by an Act of Parliament. Such an Authority would vet loan proposals made by bank management.

Only then we will have any resolution- the paralysis in decision-making at public sector banks today is very real. PSB top brass have told me categorically that they will not sign off on loan resolution without suitable assurances that the investigative agencies will not come after them- say, ten years from now!

The creation of Oversight Committees (the equivalent of my Loan Resolution Authority) under the auspices of RBI should have happened long back. The reason it did not happen was thanks to the general perception that the NPA problem is the result of mala fides on the part of bankers. If you take this view, then resolution is not possible, we can only focus on retribution. Kingfisher Airlines is, perhaps, a case in point.

PSBs were seen as having messed up on credit risk management and many were seen as basket cases. So there was talk of mergers, sale to strategic investors, creation of a "bad bank", etc. It required the Economic Survey to point out that the problem is one of excessive exuberance on the part of firms and investors and hence on the part of bankers and that the NPA problem is a case of business judgement having gone wrong, with various extraneous factors such as the global financial crisis impacting on bank decisions in a big way.

Once you grasp this, you will also grasp that the way forward is not go after bankers but to empower bank management to resolve bad loans even while strengthening mechanisms of governance at PSBs.

Monday, April 03, 2017

Mukesh Ambani has bet $25 bn on Jio, his telecom venture. He has disrupted the market hugely, causing tariffs to fall and triggering consolidation amongst existing players. He has bagged 100 million customers. But will he make money out of his venture? Schumpeter, writing in the Economist, is sceptical:

Jio will start charging from April 1st. Yet even assuming it keeps
cranking prices up and wins a third of the market, a
discounted-cash-flow analysis suggests that it would be worth only
two-thirds of the sum that Mr Ambani has spent. To justify that amount
Jio would at some point need to earn the same amount of profit that
India’s entire telecoms industry made in 2016. In other words, there is
no escaping the punishing economics of pouring cash into networks and
spectrum. For every customer that Jio might eventually win, it will have
invested perhaps $100. Compare that with Facebook or Alibaba, both
asset-light internet firms, which have invested about $10 per user.

Schumpeter thinks Ambani might tweak his business model at some point in order to improve the economics of his project but he's unsure about the outcome:

Perhaps he hopes to get his money back by turning Jio into an internet
firm that offers payment services and content, not just connectivity.
China’s Tencent, which owns WeChat, a messaging service, has
successfully diversified into games and banking. Still, no telecoms firm
has managed this feat and it is hard to see how RIL’s clannish culture
can become a hotbed of innovation.

Or is this one big brand building exercise, one that builds equity not just with ordinary people but with the government as a huge exercise in inclusion?

Wednesday, March 22, 2017

Calcutta (as the city was then called) descended into an orgy of what has been perceived as communal riots in 1946. The killings were seen as an important factor that made Partition inevitable- it seemed to suggest that Hindus and Muslims would find it difficult to live together in one country.

It was fascinating, therefore, to get a quite different perspective on the killings in a book on the subject reviewed recently in EPW. The author contests the idea that the killings were primarily communal in nature. Rather, he's inclined to give more weight to the famine of 1943 inflicted - that's the right word, as it was entirely avoidable in terms of the supply of and demand for foodgrains- on the city by the British.

The author of the book, the reviewer points out, is of the view that the scorched earth policy pursued by the British following the threatened invasion of Bengal by Japan in World War II was by far the more important factor in fuelling the rights. The British emptied the rural areas of foodgrain stocks to prevent these from falling into Japanese hands. They also destroyed transportation by boats by impounding the boats, again to prevent these from falling into Japanese hands. Both these resulted in an artificial scarcity of foodgrains in the countryside. ( I have read elsewhere that inflated estimates of food output caused the British to export large amounts to support the war in other parts of the world).

Calcutta was treated differently because it was the epicentre of the war effort in the region. Workers had to be fed in order to maintain production for the war, so ration shops were set up to ensure availability of food. The two factors together- scarcity of food in the countryside and relative abundance in Calcutta- caused people to flock to Calcutta putting enormous pressure on those staying in the city for long. It was the battle for territory between those resident in Calcutta for long and the migrants that primarily resulted in riots, the author contends, the riots were not communal in origin.

This
communal single-mindedness that Das speaks of in the Great Calcutta Killings,
Mukherjee shows, is simply not borne out by the historical record. Instead, the
violence was chaotic and driven by a range of factors. First, the fact that
British targets came under attack in the bedlam has fallen through the cracks
in this rush to prise a communal angle from the violence. On Chowringhee, the
Main Street of White Calcutta, several European shops and business were
plundered, as was an Enfield motorcycle showroom on Park Street. The Statesman
House, which housed the main newspaper of White Calcutta, also came under
attack but was saved by prompt police action. In Dharamtolla, a Bata showroom,
a Czech company, was similarly saved from the mob by the police.

Does
widespread looting—of European and Indian targets—fit the mould of the crowds
having a sense of “moral duty”? Again, here the looting has been explained in
terms of Hindus looting Muslim shops and vice versa—a theory little backed up
by data. In the chaos, very little of who attacked whom was actually recorded.
Driven by a concurrent cloth famine, cloth merchants were targeted. And of
course, the authorities were wary of food stocks being ransacked, so the civil
supplies department was heavily guarded. Given this data, Das’ dismissal of the
riot having an economic component falls under heavy strain.

This indeed casts new light not just on the Great Killings but on the Partition that followed. The author also suggests that Bengal PM Suhrawardy has been unfairly maligned. Britian's role in bringing about the Partition of India is far greater than one had thought.

This
communal single-mindedness that Das speaks of in the Great Calcutta
Killings, Mukherjee shows, is simply not borne out by the historical
record. Instead, the violence was chaotic and driven by a range of
factors. First, the fact that British targets came under attack in the
bedlam has fallen through the cracks in this rush to prise a communal
angle from the violence. On Chowringhee, the Main Street of White
Calcutta, several European shops and business were plundered, as was an
Enfield motorcycle showroom on Park Street. The Statesman House, which
housed the main newspaper of White Calcutta, also came under attack but
was saved by prompt police action. In Dharamtolla, a Bata showroom, a
Czech company, was similarly saved from the mob by the police.
Does widespread looting—of European and Indian targets—fit the mould
of the crowds having a sense of “moral duty”? Again, here the looting
has been explained in terms of Hindus looting Muslim shops and vice
versa—a theory little backed up by data. In the chaos, very little of
who attacked whom was actually recorded. Driven by a concurrent cloth
famine, cloth merchants were targeted. And of course, the authorities
were wary of food stocks being ransacked, so the civil supplies
department was heavily guarded. Given this data, Das’ dismissal of the
riot having an economic component falls under heavy strain.
- See
more at:
http://www.epw.in/journal/2017/8/book-reviews/revisiting-our-narratives-great-calcutta-killings.html#sthash.1VAOCo0Y.dpuf

This
communal single-mindedness that Das speaks of in the Great Calcutta
Killings, Mukherjee shows, is simply not borne out by the historical
record. Instead, the violence was chaotic and driven by a range of
factors. First, the fact that British targets came under attack in the
bedlam has fallen through the cracks in this rush to prise a communal
angle from the violence. On Chowringhee, the Main Street of White
Calcutta, several European shops and business were plundered, as was an
Enfield motorcycle showroom on Park Street. The Statesman House, which
housed the main newspaper of White Calcutta, also came under attack but
was saved by prompt police action. In Dharamtolla, a Bata showroom, a
Czech company, was similarly saved from the mob by the police.
Does widespread looting—of European and Indian targets—fit the mould
of the crowds having a sense of “moral duty”? Again, here the looting
has been explained in terms of Hindus looting Muslim shops and vice
versa—a theory little backed up by data. In the chaos, very little of
who attacked whom was actually recorded. Driven by a concurrent cloth
famine, cloth merchants were targeted. And of course, the authorities
were wary of food stocks being ransacked, so the civil supplies
department was heavily guarded. Given this data, Das’ dismissal of the
riot having an economic component falls under heavy strain.
- See
more at:
http://www.epw.in/journal/2017/8/book-reviews/revisiting-our-narratives-great-calcutta-killings.html#sthash.1VAOCo0Y.dpuf

This
communal single-mindedness that Das speaks of in the Great Calcutta
Killings, Mukherjee shows, is simply not borne out by the historical
record. Instead, the violence was chaotic and driven by a range of
factors. First, the fact that British targets came under attack in the
bedlam has fallen through the cracks in this rush to prise a communal
angle from the violence. On Chowringhee, the Main Street of White
Calcutta, several European shops and business were plundered, as was an
Enfield motorcycle showroom on Park Street. The Statesman House, which
housed the main newspaper of White Calcutta, also came under attack but
was saved by prompt police action. In Dharamtolla, a Bata showroom, a
Czech company, was similarly saved from the mob by the police.
Does widespread looting—of European and Indian targets—fit the mould
of the crowds having a sense of “moral duty”? Again, here the looting
has been explained in terms of Hindus looting Muslim shops and vice
versa—a theory little backed up by data. In the chaos, very little of
who attacked whom was actually recorded. Driven by a concurrent cloth
famine, cloth merchants were targeted. And of course, the authorities
were wary of food stocks being ransacked, so the civil supplies
department was heavily guarded. Given this data, Das’ dismissal of the
riot having an economic component falls under heavy strain.
- See
more at:
http://www.epw.in/journal/2017/8/book-reviews/revisiting-our-narratives-great-calcutta-killings.html#sthash.1VAOCo0Y.dpuf

This
communal single-mindedness that Das speaks of in the Great Calcutta
Killings, Mukherjee shows, is simply not borne out by the historical
record. Instead, the violence was chaotic and driven by a range of
factors. First, the fact that British targets came under attack in the
bedlam has fallen through the cracks in this rush to prise a communal
angle from the violence. On Chowringhee, the Main Street of White
Calcutta, several European shops and business were plundered, as was an
Enfield motorcycle showroom on Park Street. The Statesman House, which
housed the main newspaper of White Calcutta, also came under attack but
was saved by prompt police action. In Dharamtolla, a Bata showroom, a
Czech company, was similarly saved from the mob by the police.
Does widespread looting—of European and Indian targets—fit the mould
of the crowds having a sense of “moral duty”? Again, here the looting
has been explained in terms of Hindus looting Muslim shops and vice
versa—a theory little backed up by data. In the chaos, very little of
who attacked whom was actually recorded. Driven by a concurrent cloth
famine, cloth merchants were targeted. And of course, the authorities
were wary of food stocks being ransacked, so the civil supplies
department was heavily guarded. Given this data, Das’ dismissal of the
riot having an economic component falls under heavy strain.
- See
more at:
http://www.epw.in/journal/2017/8/book-reviews/revisiting-our-narratives-great-calcutta-killings.html#sthash.1VAOCo0Y.dpuf